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Gilead Needs to Ask, "YMI Buying This Biotech?"

Gilead buys YM Biociences for its myelofibrosis drug, but has one of its own.

I think Gilead Sciences(NASDAQ:GILD) has the right idea. If it's going to expand beyond its core antiviral business, it might as well add as many products as possible. Might as well put to work that $1.7 billion that it had in the bank at the end of the third quarter. In recent years, the drugmaker purchased Arresto Biosciences and Calistoga Pharmaceuticals for their oncology programs, and established a research partnership with Yale University.

But I'm not sure the latest addition, courtesy of an acquisition of YM Biosciences(UNKNOWN:YMI.DL) for $510 million, was the best choice. The biotech is developing a drug called YT387 to treat myelofibrosis, a disease where bone marrow stem cells go haywire and produce scar tissue that replaces healthy bone marrow.

The data for YT387 has looked fine so far, but the drug has only completed phase 2 trials, and YM Biosciences has dragged its feet starting phase 3 trials. It seems likely the delay was because it was looking for a partner/acquirer, meaning Gilead probably wasn't the first company to look at the product. Assuming that's true, what are the warts that others saw that caused them to pass on YT387?

Perhaps it was just an issue of price. Before today's announcement, YM Biosciences was well off its 52-week high. Even with the 81% premium that Gilead is paying, the price is still well below where YM Biosciences traded last year.

Gilead plans to start a phase 3 program once it closes the acquisition. The drug is years behind Incyte's (NASDAQ:INCY) Jakafi, which was approved last year to treat myleofibrosis and has struggled a little, suggesting the myelofibrosis market isn't as that large as investors have hoped.

And there's other potential competition. Cell Therapeutics(NASDAQ:CTIC) also has a drug to treat myelofibrosis, although it doesn't look like much of a threat. And Gilead has a drug called simtuzumab that it's testing in myelofibrosis. Simtuzumab and YT387 have different mechanisms of action, so perhaps Gilead is planning on testing them in combination.

If that's the case, the recent purchase probably makes more sense. Gilead is kind of good at creating combo product, you know.